The US stock market plummeted again, with a single-day loss of up to $2.36 trillion. The reason for this is that the US Department of Labor released the CPI index for August. US inflation exceeded expectations, so investors were scared. Many experts and investors suggested that Federal Reserve cut interest rates, otherwise the US economy would fall into deflation. So the question is, is the lethality of high inflation so strong? Why can the U.S. Department of Labor release a set of data that can cause the United States to suffer heavy losses due to a sharp drop?
html In August, the US CPI rose 8.3%, 0.2% higher than expected, but it still fell 0.2% compared with July. So why does US stock still plummet? Is it just because it exceeded expectations by 0.2%? This involves multiple factors. First, after excluding energy and food prices, the core CPI rose by 0.6% month-on-month, twice the expected one. This shows that although the core CPI has not been suppressed after two aggressive interest rate hikes in June and July, the core CPI has not been suppressed, which indirectly shows that the aggressive hikes in interest rate suppression is not effective. If it weren't for the decline in energy prices, the CPI data would be even more ugly. Second, the real CPI index in the United States far exceeds the published data.
None of the real data of the US CPI now knows, because in order to avoid more panic and for their political achievements, the US senior management has adjusted their CPI calculation method many times. The purpose of the adjustment is not to make the data more accurate, but to make the data lower and better look. Therefore, the current real data of the US CPI is higher than the published CPI data. Many investors in the US believe that the real CPI may be more than twice as high as published. No one has accurate evidence to prove how high it is, so we can only infer, but what is certain is that the real CPI data is higher than the published data.
Third, multiple positive factors are still unable to cut interest rates. Investors are very disappointed. After two rounds of aggressive interest rate hikes, oil prices fell in August, the impact of the epidemic on the United States also began to decline, and the decline of the unemployment rate in the United States began to recover. These should be positive for ease of inflation, but they did not relieve the US inflation much. For investors, this is like using many methods to solve inflation. As a result, everyone found that there was almost no effect, so everyone was disappointed and pessimistic.
Fourth, the US government is still insisting on not reducing the tariffs imposed. I have repeatedly emphasized that if you want to alleviate inflation, the best way is to import a large number of cheap goods and let energy prices fall. However, the United States is unwilling to reduce the tariffs imposed on China, so the prices of imported goods will naturally not drop, and high inflation will naturally not ease. Investors see the US government's attitude of not being loose, and they know that the effect of suppressing inflation by relying solely on interest rates and other means will not be good, so pessimism erupts.
Although the US energy price in August fell compared to before, it was still at a high level compared with previous years. The prices of the goods produced in this way were naturally higher, and inflation naturally could not decline. Moreover, due to the impact of the situation in Russia and Ukraine, American energy companies tried hard to export energy at high prices in order to make a lot of money. As a result, local energy is relatively scarce, prices cannot fall sharply. Therefore, although the energy price has fallen, the relief of US inflation is still limited, and energy prices may soar again at any time, because American energy companies want to sell more energy to Europe to help them overcome the crisis. With the arrival of winter, both the United States and Europe need more energy. The energy shortage may occur again, and the natural rise in prices will push up inflation again, so investors are worried that the situation will not be good in the future.
Stock markets often reflect the economic situation 3 to 6 months later. This time, American investors sold a lot, but they were not optimistic about the US economy in the next quarter or even the next two quarters. Of course, investors are even more optimistic about the aggressive interest rate hike, because this will cause great harm to the US economy and is very bad news for the stock market. Let me explain it with a set of data.
The net debt of the US government is now about $20 trillion, and the US household housing loans are about $11 trillion. The two items combined are equivalent to 150% of the US GDP. For every percentage point increase in the Federal Reserve's interest rate, the US government will increase its interest expense by an additional $200 billion. This is why I have always emphasized that the US is afraid of continuing to aggressively raise interest rates as before, because if this continues, the interest that the US needs to pay is too high and it will be difficult for them to bear in the long run. The interest paid alone is equivalent to 1% of the US GDP. According to previous practice, the interest rate hike is generally around 4%, which means that at least 4% of the US GDP will be lost. Why do you say at least? Because housing loans can also indirectly harm the US economy.
After the interest rate rises, the American people need to pay higher loan interest. 11 trillion US dollars means paying an additional hundreds of billions of dollars. Although this money has become the bank capitalist, the consumption capacity of the majority of people who buy houses with loans will be overdrawn, and the real estate industry will also be in a downturn, which will affect more industries. So although the interest rate is only increased by a few percentage points, it will eventually spread to all aspects of the US economy, causing significant losses to the economy, and even the US government will experience a serious fiscal crisis and a crisis of trust.
So although inflation has declined compared to July, the index reflects that the US economy is facing the risk of a severe recession, because if this continues, consumers' consumption capacity will only be overdrawn, which will only make the future economy worse. From an economic perspective, all three American troikas have problems. First of all, high interest rates make it difficult for companies to bear, so their loans will decrease, which means that companies' investment in the future will decrease; secondly, high inflation will reduce people's consumption capacity, which means that there is another problem in the United States; thirdly, the United States itself is a country dominated by imports, and the global economy is in a downturn this year. Whether it is , Apple or other American companies, their income has begun to decline, so their high-end commodity exports have also been problematic. Overall, there are problems in investment, consumption and exports that drive the economy. The US economy will naturally not be optimistic in the future, so American investors have sold their stocks one after another, and the loss of US stocks in a single day is as high as US$2.36 trillion.
US stocks plummeted so much, and many American economists and companies hope to suspend interest rate hikes. So will the Federal Reserve agree? My answer is that the Federal Reserve is also in a dilemma. The United States is currently experiencing the most difficult situation. The United States can only rely on the US dollar to support its hegemony. Therefore, we cannot be discouraged at this time. We must insist on hikes. As long as we wait for other major countries to break out and collapse, even if the United States wins the final victory, if other countries are more resilient and survive the transfer of this wave of crisis in the United States, the United States will have to end the interest rate hikes early because the interest rate hikes are backfired, so the Federal Reserve is in a dilemma now.
